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Rupee, Taxes Keep Demand Down in India

June 28, 2012 – Weaker local currencies are keeping down gold demand in India, the world’s largest consumer of gold, according to Reuters India. Consumers in Indonesia as well as India are keeping more cash on hand over concerns of a serious deterioration in the situation of the European Union.

Premiums for gold coins and gold bars have remained steady in Hong Kong, Tokyo, and Singapore.

In addition to the weaker currency and concerns over the European Union, traders in India are waiting for the monsoon season to pick up because the additional rain could boost the income of farmers who constitute more than half of the Indian gold market.

The rupee has hit a new low in the last week as the Indian government doubled its import duty to 4 percent in March in an effort to fight the deficit.

Trading in gold remained unchanged at $1,571.50 per troy ounce after a drop on Tuesday.

The Indian central bank is also considering a ban on sales of gold coins by Indian banks. A source within the central banking system in India says the imports of gold bullion are extending the weakness in the rupee. A relaxation of the rules on commodities trading allowed banks to sell gold coins in an attempt to sterilize dollar inflows that caused the rupee to appreciate in the years before 2008.

“Banks were allowed to sell gold by importing it to fight the excess dollar flows,” said a senior Reserve Bank of India official.

“By the same logic, the measure should be reversed now as we are at the opposite end of the spectrum. It was a temporary measure, which unfortunately was made permanent by banks.”

Total Indian gold demand last year was 933.4 tonnes, data from the World Gold Council shows. Of that demand, 366 tonnes were in the form of gold coins or gold bars, with the Indian market making up 25 percent of the global gold investment demand for gold coins and bars.

Earlier in this year, the RBI tightened its rules on gold lending companies and set up a working group with the charter to examine the industry. The Finance Minister Pranab Mukherjee said this month that Indians should invest in “wealth generating” assets instead of buying gold.

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